Back to Growth and Latest Market Thoughts
Northlake’s Style model flipped back to growth for March, so client holdings in the Russell 1000 Value (IWD) are being sold and proceeds reinvested into the Russell 1000 Growth (IWF). There is no change to the Market Cap model’s mid cap signal. Positions in the S&P 400 Mid Cap (MDY) will be held another month.
The shift to growth was led by internal indicators that measure stock market technical and trends. These indicators are shorter term in nature and are picking up the good performance of large cap growth stocks so far this year. While the Market Cap model did not shift its signal, there was strong underlying movement in favor of large caps. The one month measurement actually puts the model in large cap territory so there is a good chance the signal changes for April. The change in the Market Cap model is also being led by the internal indicators.
We are keeping the commentary on the models limited this month so we can discuss the recent market action.
What started off as a mostly technical correction in the market has evolved into a more normal correction with investor worries focused rising interest rates, a few datapoints suggesting slower U.S. economic growth, and concern over President Trump’s trade policies. Here is the note we published describing the initial pullback: http://northlakecapital.com/2018/02/06/market-and-strategy-update/
The market rallied pretty quickly and steadily off the February lows, recapturing over half of peak to trough losses. Over the past week, what might be described a retest of the lows began with multiple days of heavy selling. This time the selling appears to reflect fundamental factors. Northlake’s view is that the earlier unwinding of the short volatility trade has returned the market to more normal levels of volatility. We have exited a historic 15 month period of low volatility. We still expect prices to be higher this year and the market to post a decent gain concentrated prior to fall when mid-term election worries typically cause a pullback.
With programmatic trading no longer providing steady upside support, investors are back to worrying about the usual things including interest rates and inflation, Fed policy, and corporate earnings. We can add trade policy to that list as President Trump is moving ahead with his campaign plans to raise tariffs on imports. Economic history suggests this is a bad idea. Northlake agrees. We expect trade headlines form the U.S. and capitols of our major trading partners to add to market volatility. However, we have found President Trump to talk more than he acts and do not believe a full blown trade war will develop.
We continue to most closely monitor the rate of corporate earnings growth as we expect it to decelerate post the tax cut benefit. This is often associated with weaker periods for the stock market. We do not expect a big pickup in inflation as the deflationary forces of globalization and technology remain firmly in place. We have always thought the market and economy could handle modestly higher interest rates given even after the recent increases, rates remain at historically low levels.
Our bottom line is to strap your seatbelts and remember that this up and down action is more like what the market usually does. Keep your eye on the big picture, which we still see as positive. Perhaps the forecast has moved to partly sunny from sunny. Finally, remember that each individual’s assets should match their level of risk and be focused on the long run. For most investors, short term fluctuations matter little.
The rest of Northlake’s individual stock holdings reported earnings in February. Here are links to our analysis of each reported including updated commentary on our expectations for each stock:
Nexstar Media Group: http://northlakecapital.com/2018/02/28/conservative-guidance-sets-up-nexstar-to-outperform/
MGM Resorts: http://northlakecapital.com/2018/02/20/mgm-clears-hurdle-to-resume-uptrend/
Liberty Global: http://northlakecapital.com/2018/02/16/expectations-closer-to-reality-at-liberty-global/
CBS: http://northlakecapital.com/2018/02/16/cbs-successfully-navigating-challenging-environment/
Activision Blizzard: http://northlakecapital.com/2018/02/15/activision-blizzard-resets-the-bar-lower-for-2018/
Sherwin Williams: http://northlakecapital.com/2018/02/09/sherwin-williams-successfully-integrating-valspar-acquisition/
Disney: http://northlakecapital.com/2018/02/08/parks-and-resorts-strong-at-disney/
Apple: http://northlakecapital.com/2018/02/05/no-apple-super-cycle-but-super-financial-strength/
Facebook: http://northlakecapital.com/category/companies/facebook/
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